Housing is to Blame for Rising Inequality

Posted by Geoff Simmons49sc on January 22, 2019

Yesterday’s report from Oxfam shows that the rich are getting richer and the poor are getting poorer. The question is what is driving this?

Most people have probably seen the graphs from the United States showing how the average income there has flattened since the 1970s, while the paycheck of corporate CEOs and owners has gone up and up and up. Could it be income that is driving inequality here also?

Employees are certainly not getting their fair share in the United States, but there is less evidence of that happening here in Aotearoa. Our Productivity Commission has done the work, and the real problems here are not miserly employers. Instead, the issue seems to be sky high housing costs and poor productivity (the fact that we are not working smarter, which is also partly driven by our obsession with housing).

Are Workers Getting Their Fair Share?

When we work smarter, each person produces more in their day’s work. The idea is that they should get rewarded by being paid more as a result.

There was a lot of upheaval in the 80s and 90s about which we can debate the merit. However since 1996 the labour income share has pretty much stabilised, with more than 90% of any increases in labour productivity (working smarter) going to workers. That isn’t bad - nothing like what we see in the United States. This is backed up by the fact that since the mid 1990s income inequality hasn’t really been rising.

It seems like since the mid 1990s, workers have been pretty much getting their fair share. So we can’t lay much of the blame for rising inequality at the feet of employers.

Housing

The real problem that lies at the heart of rising inequality in New Zealand is housing.

Sky high house prices are the reason why the rich are getting richer - with the top 20% of households now owning 70% of the wealth. And housing is also the reason why the poor are getting poorer. Half of Kiwis don’t own their own home and have to rent. Rents have been rising faster than wages and prices (which determines benefit increases) since the early 1990s, probably longer.

This without a doubt has been the thing that has hurt beneficiaries and the working poor the most. Generally it is the poor and young that don’t own their own home, and so they have not benefited from the house price rises and have had to pay the higher rents without their income rising to match. When you look at inequality, poverty and child poverty figures they haven’t risen since the economic reforms of the 80s and 90s. However, when you include housing costs, inequality and poverty have risen, particularly amongst the young.

The real problem isn’t wages. It is housing.

Housing is Also One Reason Why Incomes Aren't Higher

Here's the kicker: housing isn't just the driver of inequality, it is also one of the reasons incomes aren't higher.

The big difference between incomes in New Zealand and other countries is not due to tight-fisted employers. It is due to low productivity. We simply aren’t working smarter as a country. This is a complex issue and to fix it we need to invest more as a country in infrastructure, technology and skills.

What is preventing us from investing in working smarter as a country? The main reason is because we put all our money into housing.

New Zealand has the most tax favourable environment for investment in housing of any rich country.

This has led to us having more of our assets tied up in housing than any other rich country. And what do we get for all this? The most unaffordable housing in the developed world. Meanwhile we have low levels of investment in technology and businesses that can actually create jobs and higher incomes.

So the tax breaks encouraging investment in housing is certainly to blame for rising inequality, and is also partly responsible for our low incomes compared to other rich countries.